FORM 10Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
Commission file number 0-16005
Unigene Laboratories, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2328609
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Little Falls Road, Fairfield, New Jersey 07004
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 882-0860
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- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 Par Value--38,529,432 shares as of May 1, 1998
<PAGE>
INDEX
UNIGENE LABORATORIES, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed balance sheets-
March 31, 1998 and December 31, 1997
Condensed statements of operations-
Three months ended March 31, 1998 and 1997
Condensed statements of cash flows-
Three months ended March 31, 1998 and 1997
Notes to condensed financial statements-
March 31, 1998
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
UNIGENE LABORATORIES, INC.
CONDENSED BALANCE SHEETS
March 31 December 31
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................. $ 1,561,812 $ 2,126,327
Prepaid expenses and other current assets .. 738,814 834,245
------------ ------------
Total current assets .................. 2,300,626 2,960,572
Property, plant and equipment-net
of accumulated depreciation and amortization 9,001,404 9,298,445
Patents and other assets ....................... 1,462,684 1,432,883
------------ ------------
$ 12,764,714 $ 13,691,900
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 960,620 $ 1,041,529
Accrued expenses ........................... 801,635 999,212
Notes payable - stockholders ............... 610,000 610,000
------------ ------------
Total current liabilities .................... 2,372,255 2,650,741
Note payable - stockholders .................... 655,000 655,000
9.5% convertible debentures .................... 502,694 502,694
10% convertible debentures ..................... 450,000 450,000
Stockholders' equity:
Common stock-par value $.01 per share;
authorized 60,000,000 shares, issued
38,517,722 shares in 1998 and 1997 ...... 385,177 385,177
Additional paid-in capital ................. 63,499,439 63,499,439
Accumulated deficit ........................ (55,098,820) (54,450,120)
Less: Treasury stock, at cost, 7,290 shares (1,031) (1,031)
------------ ------------
Total stockholders' equity ............ 8,784,765 9,433,465
------------ ------------
$ 12,764,714 $ 13,691,900
============ ============
</TABLE>
See notes to condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31
------------------------------
1998 1997
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<S> <C> <C>
Licensing and other revenue ................. $ 2,011,715 $ 1,442
------------ ------------
Operating expenses:
Research and development ................ 2,150,314 2,192,961
Settlement of contractual right ......... -- 1,669,063
General and administrative .............. 489,186 550,016
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2,639,500 4,412,040
------------ ------------
Operating loss .............................. (627,785) (4,410,598)
------------ ------------
Other income (expense):
Interest/other income .................... 30,340 48,198
Interest expense ......................... (51,255) (73,601)
------------ ------------
(20,915) (25,403)
------------ ------------
Net loss .................................... $ (648,700) $ (4,436,001)
============ ============
Net loss per share, basic ................... $ (.02) $ (.12)
============ ============
Net loss per share, diluted ................. $ (.02) $ (.12)
============ ============
Weighted average number of shares outstanding 38,510,432 36,019,408
============ ============
</TABLE>
See notes to condensed financial statements.
<PAGE>
<TABLE>
<CAPTION>
UNIGENE LABORATORIES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31
----------------------------
1998 1997
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<S> <C> <C>
Net cash used for operating activities .............. $ (448,637) $(2,567,809)
----------- -----------
Investing activities:
Purchase of equipment and furniture ............. (78,759) (126,087)
Increase in patents and other assets ............ (37,119) (22,644)
Construction of leasehold improvements .......... -- (18,298)
----------- -----------
(115,878) (167,029)
----------- -----------
Financing activities:
Exercise of stock options and warrants .......... -- 551,465
----------- -----------
-- 551,465
----------- -----------
Net decrease in cash and cash equivalents ........... (564,515) (2,183,373)
Cash and cash equivalents at beginning of year ...... 2,126,327 4,491,386
----------- -----------
Cash and cash equivalents at end of period .......... $ 1,561,812 $ 2,308,013
=========== ===========
Supplemental cash flow information:
Conversion of convertible debentures and
accrued interest, net of related offering expenses
into common stock ................................ -- $ 978,842
</TABLE>
See notes to condensed financial statements.
<PAGE>
UNIGENE LABORATORIES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998
NOTE A-BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 1998 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. For further
information, please refer to the Company's financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1997.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Revenue for the first quarter of 1998 consisted primarily of a $2 million
milestone payment from Warner-Lambert Company, under a July 1997 licensing
agreement, as the result of the achievement of a benchmark in the development of
an oral calcitonin product for treating osteoporosis. Revenue for the first
quarter of 1997 represents hormone and enzyme sales.
Research and development, the Company's largest expense, decreased 2% from
$2,193,000 to $2,150,000 for the three months ended March 31, 1998, as compared
to the same period in 1997. The decrease was primarily attributable to expenses
incurred in 1997 related to the Company's clinical trials for its FORTICAL(TM)
Injection product.
On February 7, 1997, the Company issued an aggregate of 490,000 shares of its
Common Stock to the holders of the Company's 9.5% Senior Secured Convertible
Debentures (the "Debentures") in consideration for the cancellation of an
obligation of the Company to pay to the holders a fee equal to 2% of the sum of
the market value as of December 31, 1998 of all of the Company's outstanding
shares of Common Stock plus the principal amount of all outstanding debt of the
Company, less its cash on deposit, up to a maximum fee of $3,000,000. The
expense associated with this transaction was valued at $1,669,063, based on a
closing price of the Common Stock of $3.40625 on February 7, 1997.
General and administrative expenses decreased 11% from $550,000 to $489,000 for
the three months ended March 31, 1998, as compared to the same period in 1997.
The decrease was primarily due to non-recurring expenses incurred in 1997 that
were associated with the Company's financing activities.
Interest and other income decreased $18,000 for the three months ended March 31,
1998, as compared to the same period in 1997, due to reduced funds available for
investment in 1998.
Interest expense decreased $22,000 for the three months ended March 31, 1998, as
compared to the same period in 1997, due to a reduction in outstanding debt from
the prior year as of result of conversions in 1997 of the Company's convertible
debentures into Common Stock.
<PAGE>
As a result of increased revenue, as well as decreased operating expenses, net
loss decreased $3,787,000 or 85% for the three months ended March 31, 1998, as
compared to the corresponding period in 1997.
As of December 31, 1997, the Company had available for income tax reporting
purposes net operating loss carryforwards in the approximate amount of
$53,400,000, expiring from 1998 through 2012, which are available to reduce
future earnings that would otherwise be subject to federal income taxes. For the
three months ending March 31, 1998, the Company accumulated additional losses of
approximately $649,000. In addition, the Company has investment tax credits and
research and development credits in the amounts of $50,000 and $1,984,000,
respectively, which are available to reduce the amount of future federal income
taxes. These credits expire from 1998 through 2012.
The Company follows Statement of Financial Accounting Standards No. 109 (FASB
109), "Accounting for Income Taxes". Given the Company's past history of
incurring operating losses, any deferred tax assets that are recognizable under
FASB 109 have been fully reserved. As of January 1, 1998, under FASB 109, the
Company had deferred tax assets of approximately $23,400,000, subject to a
valuation allowance of $23,400,000. The deferred tax assets were generated
primarily as a result of the Company's net operating losses and available tax
credits. For the three-month period ended March 31, 1998, the Company's deferred
tax assets and valuation allowances each increased by approximately $260,000.
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share" on
December 31, 1997. SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS") and supersedes APB Opinion No. 15, "Earnings Per
Share". It also requires presentation of both basic and diluted EPS for net
income on the face of the income statement and a separate reconciliation of both
EPS amounts. Basic EPS is computed using the weighted average number of common
shares outstanding during the period being reported on. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock at the beginning of
the period being reported on. The adoption of SFAS 128 has had no effect on the
Company's reported per share results.
LIQUIDITY AND CAPITAL RESOURCES
During 1994, the Company completed construction of its peptide production
facility in Boonton, New Jersey. The facility was constructed in a shell
building that is being leased under a ten-year net lease which began in February
1994. The Company has two ten-year renewal options as well as an option to
purchase the facility. The total cost of leasehold improvements and process
equipment for this facility, including current validation costs, have totaled
approximately $12 million. The improvements and equipment were primarily
financed from the remainder of the $17 million of proceeds received as a result
of the exercise by the warrant holders of the Company's Class A Warrants in 1991
and the proceeds of $2.2 million from the sale of stock in 1994. There are
currently no material commitments outstanding for capital expenditures relating
to either the Boonton facility or the Company's facility in Fairfield, New
Jersey.
The Company, at March 31, 1998, had cash and cash equivalents of $1,562,000, a
decrease of $565,000 from December 31, 1997.
The Company's ability to generate cash from operations will depend primarily
upon signing research or licensing agreements, achieving defined benchmarks in
such agreements, receiving regulatory approval for its licensed products, and
the commercial sale of these products.
<PAGE>
In 1996, the Company entered into a joint venture agreement with a
pharmaceutical company in China. This joint venture contributed $300,000 to 1996
revenues. It is uncertain whether any additional revenues will be recognized or
received in connection with this joint venture.
In July 1997, the Company entered into an agreement under which it granted to
the Parke-Davis division of Warner-Lambert Company a worldwide license to use
the Company's oral calcitonin technology. Upon execution of the agreement, the
Company received $6 million in payments from Warner-Lambert, consisting of a $3
million licensing fee and a $3 million equity investment by Warner-Lambert
(695,066 shares of Common Stock were purchased at a price of approximately $4.32
per share). In addition, the Company is eligible to receive up to an additional
$48.5 million in milestone payments during the course of the development program
if specified milestones are achieved, of which $15.5 million would be received
prior to the commencement of Phase I clinical studies in the U.S. Early-stage
milestones primarily relate to the product's performance characteristics, while
the latter-stage milestones are primarily related to regulatory filings and
approvals. The first of these milestones was achieved in February 1998,
resulting in a payment to the Company of $2 million. If the product is
successfully commercialized, the Company also would receive revenue from
royalties on product sales by Warner-Lambert and its affiliates and from the
sale of raw material to Warner-Lambert. The Company has retained the right to
license the use of its technologies for injectable and nasal formulations of
calcitonin on a worldwide basis. Management is actively seeking other licensing
and/or supply agreements with pharmaceutical companies for injectable and nasal
forms of calcitonin. However, there is no assurance that any additional
revenue-generating agreements will be signed.
The Company's cash requirements have increased to approximately $10 million per
year with the opening of its peptide manufacturing facility. In addition, the
Company faces principal and interest obligations over the next several years
under its outstanding convertible debentures and other indebtedness. However,
because of the current below-market conversion prices of each of the issues of
debentures, a substantial portion of such debentures has been, and a substantial
portion of the remainder is expected to be, converted into Common Stock, thereby
decreasing the amount of cash required for principal and interest payments.
After receipt of an aggregate of $8 million from Warner-Lambert in July 1997 and
February 1998, management believes that the Company currently has sufficient
financial resources to sustain its operations at the current level through the
second quarter of 1998. While the Company expects to achieve additional
milestones under the Warner-Lambert agreement, which will result in further
payments, the timing of such payments is uncertain and the Company may have to
rely on outside sources for financing to sustain the Company's operations over
the near term. However, there is no assurance as to the terms on which such
additional funds would be available or that in such circumstances sufficient
funds could be obtained.
Satisfying the Company's long-term liquidity requirements will require the
successful commercialization of the product licensed to Warner-Lambert or one of
its other calcitonin products. In addition, the commercialization of a
calcitonin product will require the Company to incur additional capital
expenditures, including expenditures to expand or upgrade the Company's
manufacturing operations to satisfy its supply obligations under the
Warner-Lambert license agreement. However, neither the cost or timing of such
capital expenditures are determinable at this time.
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-Q constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Reform Act"). Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or activities of the Company, or industry results, to be materially different
from any future results, performance or activities expressed or implied by such
forward-looking statements. Such factors include: general economic and business
conditions, the financial condition of the Company, competition, the Company's
dependence on other companies to commercialize, manufacture and sell products
using the Company's technologies, the uncertainty of results of preclinical and
clinical testing, the risk of product liability and liability for human clinical
trials, the Company's dependence on patents and other proprietary rights,
dependence on key management officials, the availability and cost of capital,
the availability of qualified personnel, changes in, or the failure to comply
with, governmental regulations, the failure to obtain regulatory approvals of
the Company's products and other factors discussed in the Company's various
filings with the Securities and Exchange Commission.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
The Company did not file any reports on Form 8-K during the
three months ended March 31, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIGENE LABORATORIES, INC.
-----------------------
(Registrant)
/s/ Warren P. Levy
May 15, 1998 -----------------------
Warren P. Levy, President
(Chief Executive Officer)
/s/ Jay Levy
May 15, 1998 -----------------------
Jay Levy, Treasurer
(Chief Financial Officer and
Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,561,812
<SECURITIES> 0
<RECEIVABLES> 380
<ALLOWANCES> 0
<INVENTORY> 465,902
<CURRENT-ASSETS> 2,300,626
<PP&E> 17,174,803
<DEPRECIATION> 8,173,399
<TOTAL-ASSETS> 12,764,714
<CURRENT-LIABILITIES> 2,372,255
<BONDS> 1,607,694
0
0
<COMMON> 385,177
<OTHER-SE> 8,399,588
<TOTAL-LIABILITY-AND-EQUITY> 12,764,714
<SALES> 1,715
<TOTAL-REVENUES> 2,011,715
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,639,500
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 51,255
<INCOME-PRETAX> (648,700)
<INCOME-TAX> 0
<INCOME-CONTINUING> (648,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (648,700)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
